Backwardation
When the futures price sits below the spot price — the inverse of the usual market shape.
Definition
Backwardation is the condition where a futures contract trades at a price lower than the current spot price of the underlying. It is the opposite of contango. In equity and index futures it commonly shows up ahead of large dividends or when bearish positioning and short selling drive the future to a discount. In commodities it often reflects a convenience yield — a premium for holding the physical good now.
Why it matters
A persistent futures discount can flag heavy short positioning or an imminent dividend, and it changes the economics of rolling a position. A trader rolling a long position from a discounted near-month to a higher-priced next-month effectively pays up, while a short roll can earn the roll. Because the future still converges to spot at expiry, backwardation can also mean a small tailwind for longs if spot holds.
Example
If a stock spot is at 1,500 and its near-month future trades at 1,485, the contract is in backwardation by 15 points. That discount might exist because a 15-rupee dividend is expected before expiry, which the future already prices out. As expiry nears, the future and spot converge.
See it live
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